Raising the state pension age is not the answer

The UK pension system is by far the most complex in the world and a proper
radical overhaul is long overdue, writes Ros Altmann.

10:33AM BST 07 Oct 2009

The Tories' proposals to raise the state pension age much more quickly than currently planned have caused quite a stir. Certainly, longer working lives are inevitable, especially as people are living much longer and staying healthier, while an increasing number of baby boomers will reach the age of 65 in the next few years.

However, I am not convinced that hastily-announced policies on pension reform are the best way forward. It would be far better to take time to work on ensuring a long-term, sustainable solution to the pensions crisis by radically rethinking both pensions and retirement. The Tories have said they would set up a review of the pension age. That will be most welcome, but any review should look at a much broader range of pension issues, including consideration of public sector and private sector pensions, as well as annuities and part-time work in later life.

The UK pension system is by far the most complex in the world, and a thorough overhaul is long overdue. The laws of unintended consequences often hamper well-meaning pension changes, and I certainly feel that the proposals just announced require more careful thought.

A major challenge faced by policymakers is the inadequacy of our state pension. In addition, the current system of mass means-testing of pensioners disincentivises private pension savings, as well as making it less worthwhile for poorer older people to keep working. This is not sustainable.

Indeed, if 65-year-olds cannot find work, they may be forced onto means testing while they wait for their state pension to start. This would undermine the cost saving estimates because pension credit (£130 a week) is more generous than a full basic state pension (£95.30 a week).

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Furthermore, raising the national insurance pension age will increase the discrepancy between public and private sector pension provision. Most public sector workers will still receive their taxpayer funded pensions before the age of 65 in 2016. Public sector pension schemes include an element of the state second pension, but if everyone else has to wait until age 66, then the preferential treatment for public sector workers will be exacerbated.

There are, in fact, far better ways to save money on pensions than simply raising the pension age. For example, ending the system of contracting out the state second pension could save around £6 billion a year immediately - no need to wait until 2016 for the savings. Changing the age allowance and tax reliefs would make significant savings and even allow improvement of state pensions from, say, age 75. Given the costs and inefficiencies of trying to administer complex means tests for millions of pensioners, it would be far better to pay a decent, simpler state pension to all older citizens. Then at least we would be ensuring these pensioners are better looked after, which would be a more positive message than just increasing state pension age to 66.